Traded and Nontraded Goods Prices, and International Risk Sharing: An Empirical Investigation

68 Pages Posted: 2 Jan 2013

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

University of Cambridge; University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Luca Dedola

Bank of Italy; European Central Bank (ECB)

Francesca Viani

Banco de España

Date Written: January 2, 2013

Abstract

Accounting for the pervasive evidence of limited international risk sharing is an important hurdle for open-economy models, especially when these are adopted in the analysis of policy trade-offs likely to be affected by imperfections in financial markets. Key to the literature is the evidence, at odds with efficiency, that consumption is relatively high in countries where its international relative price (the real exchange rate) is also high. We reconsider the relation between cross-country consumption differentials and real exchange rates, by decomposing it into two components, reflecting the prices of tradable and nontradable goods, respectively. We document that, as a common pattern among OECD countries, both components tend to contribute to the overall lack of risk sharing, with the tradable price component playing the dominant role in accounting for efficiency deviations. We relate these findings to two mechanisms proposed by the literature to reconcile open economy models with the data. One features strong Balassa-Samuelson effects on nontradable prices due to productivity gains in the tradable sector, with a muted offsetting response of tradable prices. The other, endogenous income effects causing nontradable but especially tradable prices to appreciate with a rise in domestic consumption demand

Keywords: incomplete markets, Harrod-Balassa-Samuelson effect, consumption-real exchange rate anomaly, terms of trade, international transmission mechanism

JEL Classification: F41, F42

Suggested Citation

Corsetti, Giancarlo and Dedola, Luca and Viani, Francesca, Traded and Nontraded Goods Prices, and International Risk Sharing: An Empirical Investigation (January 2, 2013). Banco de Espana Working Paper No. 1242, Available at SSRN: https://ssrn.com/abstract=2195453 or http://dx.doi.org/10.2139/ssrn.2195453

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

via Ostiense 139
Rome, 00154
Italy
+39 06 5737 4056 (Phone)
+39 06 5737 4093 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

Luca Dedola

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Francesca Viani

Banco de España ( email )

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Madrid 28014
Spain

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